Tax Saving Tips
* An individual reimbursed by his company for the business use of his car at a rate greater than the IRS standard mileage allowance must include the excess as income. He can then deduct the excess as a business expense, if he has substantiation that will satisfy the IRS.
* Gain on a house sale may not be taxable if the sale proceeds are used to purchase a yacht. But both the house and the yacht must qualify as the taxpayer's principal residence.
* Recording serial number of stocks might help reduce your taxable gain. It proves to the IRS when, and for how much, the stock was purchased. If the share's price went up, sales of those shares that cost the most produce the lowest taxable gain. But if the taxpayer can't prove which shares he's selling, the IRS computes the gain on a straight first-in, first-out basis.
* Silver lining to an unhappy land investment: IRS considers land a long-term capital investment. Buyers can write off losses in full against capital gains and up (0 $3,000 per year, against their regular income. If you bought an undeveloped lot from a shady land-sales company, it may pay to finish paying it off, sell at any loss, and take the tax deductions.
* An employee who relocates because of a job transfer loses the right to deduct moving expenses if he doesn't work in the new location for at least 39 weeks. Exception: The 39-week requirement is waived if the employee loses his job for reasons beyond his control or is retransferred to another location by his employer.
* If your employer reimburses or pays your moving expenses, take allowable tax deductions and report the reimbursement as additional income. Important: Check to see whether your employer reported the reimbursement as wages on your Form W-2 . If so, don't report it again.
* Moving expenses paid by landlord. Landlords seeking to persuade tenants to move often agree to pay part of all the tenants' moving costs. Tax trap: The landlord's payment is fully includible in the taxpayer's income. But the expenses reimbursed are not deductible. Reason: The move isn't connected to a change in employment. This is one of the conditions to be met before moving expenses can be deducted.
* If the doctor orders you to take a vacation, and says it's medically necessary, it may be deductible. One case: Doctor wouldn't permit the executive to go to Europe unless he took his wife along, since she was specially trained to deal with his heart illness. The wife's travel expenses were allowed as a medical deduction.
* If the check you mail to the IRS should bounce, you can sometimes avoid interest and late-payment charges. Just be sure to send in a new check within 10 days after the IRS notifies you that the original check was not honored. Enclose a detailed explanation of the circumstances beyond your control that caused the check to bounce. If the circumstances were not beyond your control, you are stuck with the extra charges.
* IRS can search your safe-deposit box: (1) If you refuse to pay taxes due. (2) If the auditor thinks you are hiding assets. The IRS can force open the box if you won't supply the key.
* IRS usually will not try to collect back taxes by levying against current Social Security benefits, veteran's benefits, GI Bill awards, and similar payments, even though it has the authority to do so. Exception: Flagrant or aggravated cases of neglect or refusal to pay.
* If an IRS agent calls: Find out if the person is a Revenue Agent or a Special Agent. (The agents are required to identify themselves.) Exercise extreme caution if it's a Special Agent. They are assigned to suspected fraud cases. Call your lawyer at once.
* If a parent buys a car for a dependent child, but keeps it in the parent's name, any uninsured casualty losses, and interest payments (to the extent allowed by law) on the car are tax deductible. If the child cosigns the loan, interest is deductible as long as the car qualifies as part of the parent's support of the child.
* Proof that a car was used for business purposes: Keep a simple log in a 3- x 5-inch notebook, listing the date, beginning and ending mileage, and purpose of each tax-deductible trip. Separate pages for business, medical, charitable, and moving-expense mileage simplify preparation of the tax return.
* Deductible costs of business driving include payments to injured pedestrians. A recent decision: Accidents by drivers are inseparable incidents of driving a car. Costs incurred as a result of such an incident are just as much a part of overall business expenses as the cost of fuel and maintenance.
* Casualty losses. Damage or loss of home or personal property entitle you to a casualty deduction, but not to the amount of the replacement cost. You can only claim the lower of either (1) the actual cost or (2) the fair market value immediately preceding the loss. In either case, you can only deduct that part of your loss that exceeds 10% of your adjusted gross income and the first $100 of each loss is not deductible.
* You can't be audited twice by the same IRS agent. Exceptions: (1) A three-year gap or longer between the periods under investigation. (2) An intervening audit by a different IRS agent. (3) Cases that are part of the IRS's Coordinated Examination Program.
* IRS audits can be postponed if an immediate examination would adversely affect your business or personal activities. If you need a particular attorney, accountant, or employee to help with the audit, a- postponement will be allowed to minimize impact on that person's business or personal activities. Under ordinary circumstances, postponements are for up to 60 days. A request for a longer extension must be approved by an IRS group manager. Internal
* Investment advice is deductible (subject to the 2 % of adjusted gross income limit now in force). But the cost of acquiring an investment (a broker's commission, for example) is not. Recommended: Have the person who advises you and handles your investment transactions itemize the bill for services. Recent case: A valuable deduction for investment advice was lost when the taxpayer could not prove how much of a one-shot investment fee was allocable to advice.
* Casualty losses are deductible even when caused by the taxpayer's carelessness. But they are not deductible if caused by gross or willful negligence. The difference: Damage to a car is deductible even when caused by the owner's poor driving. But the damage is not deductible when caused by drunken driving.
* Legal costs incurred in an action to secure title to a piece of real property are not a deductible expense. They are capital costs, which must be added to the taxpayer's basis in the property.
* Bankruptcy proceedings release an individual's wages for a levy by the IRS. One case: A taxpayer declared bankruptcy on May 14. So the IRS released a levy on her wages on May 15. But on May 16 her employer sent to the IRS wages she earned between May 5 and May 11. The taxpayer got her wages back. Reason: Under state law, she wasn't entitled to receive her wages until payday, which was May 16. And that was after she filed the bankruptcy petition.
* Long-distance phone calls made to a psychological counselor are a deductible medical expense.
* A per diem living expense allowance paid to an employee who traveled around the country in an executive training program did not have to be reported in his income. Such an allowance is not reportable if it is received while traveling away from home. Key: The employee kept his tax home in the city where he originally lived by maintaining an apartment and bank account there, and paying local taxes.
* A settlement agreement between a taxpayer and an IRS appeals office is not binding until it is reviewed and approved by a superior IRS officer with final settlement authority. One case: A taxpayer signed a settlement agreement and considered his case closed. Later, the IRS sued him for more taxes. Ruling:
The taxpayer was liable. Trap: The IRS agent who agreed to the original settlement never submitted it for approval.
* Closely held corporation's shareholders can benefit from the occasional sale of small amounts of stock to family members. Reason:
Valuation of stock of a closely held corporation is among the most difficult income and estate tax problems. But value can be readily ascertained if there has been a recent trade of stock for fair market value. Sales to family members will suffice because even close relatives have to look out for their own interests. But the sales must be genuine.
* Medical expenses are not deductible when covered by insurance, whether or not a claim is filed. One case: A taxpayer incurred medical expenses that were covered by insurance. But he didn't file a claim because of the extensive paperwork involved. Held: The expenses were not deductible. Reason: Even though the insurance did not pay for the expenses, it would have if the taxpayer had filed a claim.
* Casualty losses are not deductible when there is a reasonable chance that they may be recovered through a lawsuit. But they may be deducted when the chance of recovery is very slight. One case: A taxpayer suffered uninsured losses in a house fire, which he felt was caused by a defective television set. He deducted the loss on his return. He also brought suit against the television set's maker. The IRS disallowed the deduction because of the possibility that the loss would be recovered through the lawsuit. Court's ruling: The loss was deductible. Reason: Even the taxpayer's own lawyer thought there was little chance of winning the suit.
* Trips to shareholder meetings are generally not deductible. But the trip may be deducted if it is directly related to the management of the shareholder's investment. One case: A shareholder traveled to a meeting to try to prevent the issuance of new shares that would have diluted his interest in the company. So the travel costs, including meals and lodging, were deductible.
* New siding was deductible by a homeowner as a medical expense. Facts: The homeowner was allergic to mold, and the shingles on the old siding had grown moldy. So the old shingles were replaced with clapboard. Deduction: Cost of the siding minus any increase in the value of the home attributable to it. A doctor's recommendation helps.
* A retired salesman was denied a business expense deduction for traveling to maintain contact with people he might do business with if he ever decided to come out of retirement. Point: You can be out of business and still deduct business expenses if you have concrete plans to go back into business and serve your old customers. But a vague hope isn't good enough. Suggestion: Sit down and prepare a written business plan, and show what you have done to implement the plan.
* The owner of a two-family house in a deteriorating neighborhood left an apartment vacant for five years while she searched in vain for "decent, desirable," working tenants. Result: Depreciation and maintenance expenses on the vacant apartment were not deductible. Reason: Her standards were so unrealistic that the court decided she wasn't really in the rental business anymore, so her expenses were not deductible.
* When a business is sold, the sales agreement should allocate a portion of the purchase price to each of its assets. Reason: Specific values are needed to compute such tax items as deductions for depreciation. Specific values are also needed for possible recapture of tax liability when the assets are sold. Danger: If values aren't assigned in the sales agreement, the IRS usually assigns its own.
You undoubtedly know that business travel is tax deductible. But you may not be aware of all the other transportation and travel expenses you can deduct. Here are the most common:
* Transportation to doctors, dentists, hospitals, and the like.
* The cost of gas and oil (but not depreciation, insurance or repairs) if you use your own car for medical transportation. Or you can take flat driving allowance of 9</: a mile. In either case, you can take a deduction for tolls and parking fees.
* The cost of lodging (but not food) if you travel away from home for medical care (or accompany a child or other dependent). Maximum: $50 per day per person.
* Out-of-pocket transportation expenses if you do volunteer work for charity. If you use your car, you can deduct operating expenses (but not depreciation, insurance or repairs), or you can take 12 </: a mile plus tolls and parking fees.
* The cost of travel for the management or conservation of your investments is deductible. This includes trips to your broker or financial adviser, and also trips to look after investment property you own. It does not include trips to stockholders' meetings, except in special circumstances such as proxy fights.
* If you use your car for investment travel, you can deduct all the actual costs (including a percentage of depreciation, insurance and repairs). Or you can take the standard IRS business mileage deduction of 24</: a mile (ll</: a mile after the first 15,000 miles) plus tolls and parking fees.
* The deduction for travel to investors' conventions or seminars was killed by the Tax Reform Act.
* Courses to maintain or improve your skills on the job are deductible. But the deduction for transportation is limited to travel between your place of employment and the school. Transportation between home and school is not deductible. Exception: If the school is located beyond the general area of your business location (for instance, 50 miles out of town), you can deduct the cost of all transportation between that general area and the school.
* If you attend school away from home, you can deduct all travel expenses, including board and lodging. The rules are the same as for business trips.
* Since travel for education is a form of business travel, you can deduct all actual car expenses or take the regular 24<t-a-mile business allowance.
Caution: You can never deduct the costs of education to prepare you for a new or different occupation. For example, you couldn't deduct the cost of attending law or medical school.
* The cost of looking for a new job in your present trade or business is deductible including transportation to employment agencies, job interviews, and the like.
* Out-of-town travel costs, including board and lodging, are deductible if the trip is made for the primary purpose of job hunting. If the trip is primarily for personal reasons, you can deduct only the direct costs of any job hunting you do in the other city, e.g., local transportation to job interviews.
* Deduct all actual expenses of using your car for job hunting, or take the standard IRS 24<t mileage allowance.
You cannot normally deduct the costs of traveling to and from work. But there are exceptions:
* Tools and equipment. If your boss requires you to transport tools and equipment to and from the job, you can deduct any additional costs you incur (e.g., buying or renting a trailer).
* Travel between jobs. If you work at more than one job, you can take a deduction for the cost of traveling from one job to another.
Example: Jones works for the Alpha Corp. from 9 A.M. to 5 PM. and has an evening job at the Omega Co. from 6 PM. to 10 P.M. He can't deduct the cost of traveling to Alpha in the morning or of coming home from Omega at night, but he can deduct his travel from Alpha to Omega.
* Temporary assignment. An employee on temporary assignment can deduct travel costs, even if the assignment is within commuting range, provided it's "beyond the general area of his tax home."
Example: Smith lives and works in New York. He's assigned to a company project 75 miles out of town and drives to and from the project from his home every day of the month. The round trip costs $40 a day. Smith can deduct these costs as a business expense.
Disclaimer: While every effort is made to ensure that the content of this website is accurate, the website is provided “as is” and Bizmove.com makes no representations or warranties in relation to the accuracy or completeness of the information found on it. While the content of this site is provided in good faith, we do not warrant that the information will be kept up to date, be true and not misleading, or that this site will always (or ever) be available for use. Nothing on this website should be taken to constitute professional advice or a formal recommendation and we exclude all representations and warranties relating to the content and use of this site.
Copyright © by Bizmove. All rights reserved.